State and Local Public Policy from the Mercatus Center

Menu

Tag Archives: New Deal

The New Deal deficit spending helped boost the economy and bring the unemployment rate down to single-digit levels, but fear of deficits limited the scale of New Deal programs and caused Roosevelt to reverse course and cut back on spending in 1937, just as the economy was gaining momentum.

So writes Dean Baker in the New Republic. This is marginally better than the myth I learned in high school: FDR saved capitalism from itself by embracing the wisdom of Keynesian economics. He “primed the pump” with massive deficit spending and lifted the economy out of the Great Depression.

My high school story was a tad inconvenient for those who are fans of both Keynes and FDR: In 1940—7 years after the New Deal had begun—the unemployment rate still hovered at an astounding 14.6 percent.

But the high school myth turned out to be wrong: Keynesian economics didn’t end the Great Depression because Keynesian economics was never tried. Keynes, remember, called for deficit-financed spending during downturns (and surpluses during times of plenty to pay off the debt). The data show that FDR (and Congress) implemented half of the Keynesian stratagem: real spending dramatically increased throughout the Great Depression.

The problem—from a Keynesian perspective—is that they also massively increased (already-high) taxes so that, even as the economy collapsed, revenue soared.

The primary failure of fiscal policy to be expansive in this period is attributable to the sharp increases in tax structures enacted at all levels of government. Total government purchases of goods and services expanded virtually every year, with federal expansion especially marked in 1933 and 1934. [But] the federal Revenue Act of 1932 virtually doubled full employment tax yields.

But notice, Brown doesn’t say that FDR failed to be Keynesian because he stopped spending; he failed to be Keynesian because he also raised taxes. But that doesn’t stop many in the punditry from claiming that, in his later years, FDR was converted into some sort of proto-Paul Ryan.

Anthony Flint of the Lincoln Institute of Land Policy wrote a Boston Globe op-ed explaining that cities are well placed to become increasingly important centers of population and commerce. This is due in part to the ongoing pattern of national urbanization and in part to the Obama administration’s emphasis on the importance of cities and sustainable development.

Smart growth, a policy championed by some people within the environmentalist and urbanist movements, advocates goals such as improving public transportation, protecting the environment, creating affordable housing, and supporting economic development. These goals are hard to find fault with, but the question remains whether federal policy is an appropriate place to be promoting a specific type of urban development.

Flint cites Jane Jacobs as an important thinker in shaping the contemporary ideal of urban living with vibrant mixed-use development that invites pedestrian use. While this sort of development fits in with some “smart growth” objectives, Jacobs emphasized that land use needed to be determined using local knowledge rather than top down mandates. She fought these mandates at the municipal level, and one can only imagine how she would react to development direction from the newly created Office of Urban Affairs.

While many cities and municipalities are still seeking approval on projects that propose to use federal stimulus money, a Tennessee county has used a different model to attempt to employ as many of its citizens as quickly as possible. The New York Times details the county’s efforts to put stimulus money to work in an area where unemployment levels recently exceeded 25 percent.

Rather than waiting for big projects to be planned and awarded to construction companies, or for tax cuts to trickle through the economy, state officials hit upon a New Deal model of trying to put people directly to work as quickly as possible.

They are using welfare money from the stimulus package to subsidize 300 new jobs across Perry County, with employers ranging from the state Transportation Department to the milkshake place near the high school.

Given the constraints of the American Recovery and Reinvestment Act, Perry County may be maximizing the potential of these federal dollars to lower current unemployment rates. The Tennesseanreports that the immediate effects of this program have been successful:

The centerpiece of an innovative job-creation program has put 300 residents to work temporarily, including 200… who are employed in the private sector, working at the local country club, insurance offices, hardware stores, trucking firms and the Subway sandwich shop.

What sets this program apart from other stimulus-related ones around the nation is that workers’ wages and benefits are paid directly by federal funds. It is the only stimulus initiative in the country like this, at least on this scale, according to federal Health and Human Services officials.

Aside from the local benefits of rapidly spending its ARRA allotment, the Perry County model is likely a better attempt at effective discretionary fiscal policy than has been witnessed in places that have yet to begin spending their stimulus money. A standard critique of discretionary fiscal policy is that is has long lags before taking effect, meaning that changes in taxing or spending in response to changes in the business cycle are likely to exacerbate, rather than smooth peaks and troughs in the business cycle. If it is possible to create spending programs that minimize these lags, Perry County has likely done just that.

As with other programs using stimulus funding, however, seeing success in Perry County’s unemployment reduction relies on a short-term view of economic heath. The jobs funded by ARRA will likely disappear once these funds run out and public support for job creation wanes. A local television news station explains:

The jobs are only temporary and will end a year from September. County Mayor John Carroll says the jobs are just a bandage: stopping the bleeding, but not a permanent fix.

Federal spending in places like Perry County has the potential to help people weather the current recession, but it may do more long run harm than good. Many manufacturing jobs that were once located in America are now outsourced to places where they can be executed more cost-effectively, but this trend does not require federal support to artificially create jobs for low-skilled domestic workers.

Instead, for long-term economic health, former manufacturing centers need to allow the private investment to direct their labor pools toward their new comparative advantages.